The Outside Reversal | Trading Lesson
Trading Pattern

The Outside Reversal

Master the art of buying pullbacks using the outside reversal pattern to capture short-term price reversals in uptrending stocks

Pullbacks are a natural part of uptrends, and knowing when to re-enter a stock during these pauses can significantly enhance your trading edge. The outside reversal is an excellent pattern for buying pullbacks, especially when aligned with key moving averages. By understanding its structure and application, traders can capitalize on short-term price reversals while managing risk effectively.

Learning Objectives

By the end of this lesson, you will be able to:

  • Identify the outside reversal pattern and its variations
  • Understand its role in pullback trading and uptrend entries
  • Recognize key conditions for a high-probability outside reversal trade
  • Use this pattern to manage risk and scale into positions effectively

What Is the Outside Reversal Pattern?

Definition

An outside reversal occurs when price:

  1. Trades below the low of the previous day
  2. Reverses intraday to close above the previous day’s low or high

Variations

  • Bullish Engulfing: The current bar engulfs the prior bar’s range, closing higher
  • Piercing Pattern: Price opens below the prior low but closes in the upper half of the previous bar’s range
  • Bullish Counterattack: Price gaps lower but closes at or near the previous close

Other Names: Known in trading circles as the “Oops Reversal,” “Red Dog Reversal,” or “Bullish Reversal.”

Outside Reversal Pattern Example
Outside Reversal Pattern Structure

When and Why to Use the Outside Reversal

When to Use It

  • During pullbacks in an uptrend
  • Around key support levels, such as the 10-day or 20-day exponential moving average (EMA)
  • At the early stages of a developing bull flag

Why It Works

  • Sellers Exhausted: The pullback flushes out weaker holders, creating an opportunity for buyers to step in
  • Institutional Support: Large buyers often accumulate shares near support, driving the reversal

Example in Tesla (TSLA)

  1. The stock pulls back for a few days, nearing the 10-day EMA
  2. It gaps below the prior day’s low but quickly reverses, trading back above that low
  3. This signals a potential end to the pullback, triggering a continuation of the uptrend

How to Trade the Outside Reversal

Entry Strategy

  1. Intraday Entry: Buy when price trades back above the prior day’s low during the session
  2. End-of-Day Confirmation: Enter near the close if the stock finishes strong above the prior day’s low

Stop Placement

  • Place your stop just below the low of the current day’s reversal bar to minimize risk

Adding to Positions

  • Use the outside reversal to add to existing positions during pullbacks
  • Combine with other patterns like the Wick Play or bull flags for enhanced conviction

Conditions for High-Probability Trades

Key Conditions

  1. Support Levels: Ensure the pullback aligns with the 10-day or 20-day EMA
  2. Volume Confirmation: Look for increasing volume during the reversal to confirm institutional buying
  3. Trend Context: Only use this pattern in established uptrends. Avoid trading reversals against the broader trend

Avoid Overextension

  • Do not trade the outside reversal if the stock is far from its short-term moving averages
  • This pattern is a tool for entering trending stocks, not catching falling knives
Tip: The outside reversal works best when combined with strong trend context and clear support levels. Always ensure the broader trend remains intact before using this pattern.

Reflection

Why is the alignment with short-term moving averages critical for the outside reversal pattern?

Conclusion

The outside reversal is a powerful tool for capturing pullbacks within strong uptrends. By combining it with key support levels and volume confirmation, you can confidently re-enter or add to positions while managing risk effectively.

Use the outside reversal as a structured method to buy pullbacks, ensuring it aligns with the broader trend and moving average support.

Action Items

  1. Study historical charts for outside reversals near key moving averages
  2. Practice identifying this pattern in live markets, focusing on volume and price action
  3. Incorporate outside reversals into your trading plan for pullbacks in trending stocks
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